US Weekly Economic Briefing: 25 Feb 2013

9 PagesOxford EconomicsFebruary 25, 2013
SKU: OFE4983963

Many new monetary policy tools such as outright bond purchases are untested over the long run and may have uncertain effects. Under conditions of higher than expected growth with unhinged inflation expectations, monetary policy would shift suddenly. An early tightening would raise long-term funding costs through higher interest rates and wider spreads. Equity markets would react negatively to the policy shift and higher mortgage rates would slow residential investment. Internationally, a rapid increase in interest rates would widen emerging market bond spreads, increase volatility and raise the chance of credit downgrades. Capital flows previously attuned to a flood of liquidity from central banks may reverse, causing further negative secondary effects We capture these dynamics in our Global Macroeconomic Model and assume that higher than expected consumption and investment in the US would accelerate GDP towards 4.5% in 2014 before aggressive Federal Reserve action to combat inflation expectations. The impact is a deceleration to 0.6% growth in 2015 and recession in 2016. Eurozone growth would rise to 1.7% in 2014 before slowing to sub-1.0% growth in 2016 as financial and trade linkages begin to bite. After 4.0% in 2013, world GDP growth, on a PPP basis, would rise to 4.9% in 2014 and then slow to around 3.0% in 2016.